David Cummings on Startups

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  • Generic Market Research Questions

    Recently an entrepreneur emailed me some market research questions as they’re working on refining their product and trying to better understand the pain points. Seeing the list, I immediately thought that this is a good starting point for other entrepreneurs doing research as many of the questions can be repurposed to be broadly applicable.

    Here are some generic market research questions where ‘XYZ’ should be substituted for the specific topic:

    • How do you currently accomplish XYZ?
    • How many people in your organization are involved in XYZ?
    • Have you ever had any problems with XYZ?
    • What are your most common problems with XYZ, if any?
    • What is the workflow like for people that are involved in XYZ?
    • How would you make XYZ better?
    • What do you dislike the most about XYZ, outside of the problems?
    • With 10 being most important and 1 being least important, how important is it for you to improve XYZ?
    • With 10 being most important and 1 being least important, how important is it for you to solve the biggest problem with XYZ?
    • What other products or services related to XYZ do you use?
    • Are there any challenges with the related products or services?
    • Any other thoughts, comments, or recommendations for us?

    Entrepreneurs researching a market would do well to employ these questions as they gather information and talk to prospective customers.

    What else? What are some more generic market research questions to add to the list?

  • University-Affiliated Angel Networks

    One of the projects I’ve been helping out with recently is the Duke Angel Network. Universities have been making a stronger entrepreneurial push over the past few years and startup funding is always a challenge. With the Duke Angel Network, the idea is to review Duke-affiliated startups that have a student, alumni, faculty, staff, or parent of a graduate on the founding team and present qualified companies to angel investors that are Duke-affiliated (same criteria for affiliation).

    Startups that raise money from the Duke Angel Network then have the option for a smaller matching investment from the Duke Innovation Fund. The Duke Innovation Fund is a charitable pool of committed capital that’s an evergreen vehicle to continually invest in Duke-affiliated startups indefinitely (e.g. all fund profits go back into the fund to invest in more startups). People can donate to the Duke Innovation Fund, get a charitable deduction, and know that the money will go to help the Duke-affiliated startups in perpetuity.

    Here are a few thoughts on university-affiliated angel networks:

    • Part of the pitch is that investing with a network of angels, whereby there are more people with expertise for any specific deal, will increase the overall returns (I’m hopeful this plays out but I don’t believe it will be the case)
    • Increasing tech transfer (licensing university developed IP) is also a goal such that the more commercialization of technology – funded by the affiliated angel network – will generate greater returns for the university
    • Development offices are fans of university-affiliated angel networks as it can help increase the affinity for the university and generate more engagement

    Look for more university-affiliated angel networks to emerge, especially as entrepreneurship remains hot and universities seek to engage with their constituents.

    What else? What are some more thoughts on university-affiliated angel networks?

  • Solving One Problem Magnifies Another

    Things are going well but there’s this nagging issue that won’t go away. If we could only solve this one problem, everything else would be great. Only, once the problem is solved, the next most important problem is magnified. And, it never stops.

    Solving one problem magnifies another.

    Here are a few thoughts to keep in mind:

    As an entrepreneur, it’s easy to get overwhelmed with all the on-going problems and challenges. Find a good cadence knowing that solving one problem magnifies another, and figure out how to grind it out.

    What else? What are some more thoughts on the idea that solving one problem magnifies another?

  • Tranche Investments in Startups

    Over the past year I’ve seen a little-used investment strategy come up a few times: the tranche. With a tranche, money is typically invested over two or three milestones based on the progress of the company (often at the will of the investor, and sometimes contingent on the entrepreneur’s approval). As an example, $250,000 might be put in immediately, and within the next six months, the investor has the option to put in an additional $250,000 at the same terms.

    Clearly, this is a nice benefit for the investor as they can see how the company performs before putting in the additional money, and if the company does well, the second part of the tranche investment is a better deal because the company is worth more as the investor is buying the equity at the previous valuation. Only, there are a few more nuances at play as well. Here are some thoughts on tranche investments:

    • Entrepreneurs almost always operate, and spend, as if the later round(s) of the tranche are going to come in, creating challenges if the business doesn’t perform as expected
    • Tranches often make the entrepreneur more beholden to the investor (possibly filtering the news to make things sound more promising) as they want to ensure that the next round of money comes in, and this can distract from growing the business
    • Tranches can be more distracting as they usually have a shorter timeframe – say three or six months – between milestones as opposed to the typical 12-24 months between financings
    • From a valuation perspective, tranches can be thought of as the average of the current valuation and the projected valuation(s) at the later milestones, such that the investor gets a bonus if the company does better than expected

    Entrepreneurs typically want to avoid tranches and focus on negotiating a fixed investment amount upfront, so that they know how much money and runway they have to grow the business before raising another round.

    What else? What are some more thoughts on tranche investments in startups?

  • What Wasn’t Said in the Response

    Last year, when talking to an entrepreneur about his startup, I asked him why he started the company. He responded that he wanted to build a big company and do well financially. Probing a bit deeper, he explained how he owned a certain percentage of the company and that there were several key financial goals he was hoping to achieve. What wasn’t said in the answer was more telling than the actual answer. Where was the excitement about changing the world? Where was the enthusiasm for solving a hard problem?

    Here are a few thoughts about what wasn’t said in the response:

    • Certain questions have certain expected responses, and they aren’t meant to be trick questions
    • When responding, the first idea in the explanation is always the most important, and most telling
    • Body language and nonverbal communication is a key part of the response

    Whether it’s an entrepreneur talking about their startup, or a potential employee sharing thoughts on their last job, what wasn’t said in the response can be even more important than what was said.

    What else? What are some more thoughts on the idea that what’s left unsaid in an answer can be critically important?

  • SaaS at 3x Revenue – Xactly Follow-up

    As a follow-up to last week’s post Notes from the Xactly S-1 IPO Filing, it’s useful to see how things played out for a newly public Software-as-a-Service (SaaS) company. With so much media and analysis around SaaS companies trading at large multiples (e.g. 8x or greater revenue), Xactly paints a much more realistic picture of a cloud computing company growing at a modest pace.

    Here are a few notes from the outcome of the Xactly IPO (NYSE:XTLY):

    • Market cap: $241M
    • Last quarter’s revenue annualized: $71M (last quarter’s revenue times four)
    • $241M / $71M = 3.3x (ignoring cash on hand, liabilities, etc)
    • Q1 2014 to Q1 2015 quarterly revenue growth: 16%

    So, for a SaaS company growing less than 20% per year, the revenue multiple here is roughly in the 3x range. This is a big difference from the huge premiums much faster growing companies earn (see Quantifying the SaaS Growth Rate Multiplier). For Xactly, it’ll be interesting to see if they can use the new cash on their balance sheet to increase their growth rate and command a much higher premium.

    What else? What are some more thoughts on SaaS at 3x revenue?

  • Video of the Week: Make Meaning in Your Company

    One of my all-time favorite entrepreneurial authors is Guy Kawasaki. His book Art of the Start is on my list of recommendations for entrepreneurs everywhere. One of his ideas that really resonates with me is the importance of making meaning in your company.

    Here is Guy Kawasaki talking on the topic as the video of the week:

    For more videos, take a look at Guy Kawasaki’s talk on Stanford’s Entrepreneurship Corner.

    Side note: one of my goals is to incorporate more videos into this blog, so look for them more regularly.

  • Talent Recombination in a Startup Community

    One of the ideas with the Atlanta Tech Village is that is would help increase talent recombination in startups. Meaning, more people in startups, especially ones that fail, would join other startups that are succeeding, such that the ones that are doing well would do even better (finding great talent is always one of the biggest challenges). Over the past year at the Village, I’ve seen the talent recombination idea play out several times. Here are a few observations about it:

    • Programs and events, like the weekly Startup Chowdown, truly help people connect and develop stronger rapport, making for faster recombinations
    • Shared community spaces, kitchens, conference rooms, game rooms, and coffee shop facilitate serendipitous interactions, helping keep different people top-of-mind
    • Interconnectedness, as well as frequency of communication, provide for more chances to know about potential opportunities for recombination
    • Stories of recombination spread quickly giving more people peace-of-mind that great people find new gigs quickly if things don’t work out

    Talent recombination is a real benefit of high-density startup communities. Team members in startups that fail find new jobs faster and startups that are doing well hire proven people faster.

    What else? What are some more thoughts on talent recombination in a startup community?

  • Atlanta Tech Village Prioritizing Local Startups

    When we started the Atlanta Tech Village, the thinking was that 80% of the building would be for tech startups (defined as having a proprietary tech product) and no more than 20% for tech related service providers. Quickly, we realized there was more demand than expected from tech startups, thus we limited the number of tech related service providers even further (e.g. only one staffing agency, etc.). Then, we noticed another challenge: a number of startups headquartered in other cities were opening their Atlanta office at the Tech Village, which is great, but with so many of them, it was crowding out local startups.

    The Atlanta Tech Village now prioritizes startups headquartered in Atlanta. We’re still working out what that means, but here are some ideas:

    • CEO and core team based in metro Atlanta
    • Fewer than 50 employees (we want to focus on seed and early stage startups)
    • Company incorporated in Georgia or Delaware (common place of incorporation)
    • Credit given for amount of time already in the Village

    Prioritizing local startups means helping those that aren’t in the Village yet as well as helping those that are already in the Village expand (there’s a good bit of expansion and contraction of startups in the building). As with anything, we’re iterating and working hard to help grow the Atlanta startup ecosystem.

    What else? What are some more thoughts on the Atlanta Tech Village prioritizing local startups?

  • The Power of Long-Term Compounded Growth

    Recently I was reading about Liquid Web and their new CEO from Atlanta, Jim Geiger (founder of Cbeyond). Liquid Web is a well known web hosting company with over 400 employees and many thousands of customers. Now, when thinking about web hosting, it’s often viewed as a commodity and a low growth industry. Only, Liquid Web was on the Inc. 5000 last year with 79% three year growth. Founded in 1997, Liquid Web has well over $50 million in revenue (probably much higher) and shows the power of long-term compounded growth.

    Here are a few thoughts on long-term compounded growth:

    • Starting with $1 million in revenue, at the end of 20 years of 20% per year growth, the company would have over $38 million in revenue
    • Recurring revenue businesses are among the easiest to grow every year because of the existing base of business to build from (that’s one of the reasons why Software-as-a-Service is so desirable)
    • Ralph Roberts bought a little cable company with 1,200 subscribers in 1963 and now the company, Comcast, has 27.2 million subscribers and $68.8 billion in revenue last year (source)
    • Many multi-generation family businesses with substantial scale are great examples of decades of compounded growth (see the Mittelstand model in Germany)
    • Einstein has the famous quote: “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” (source)

    Much like the Stanford marshmallow experiment, entrepreneurs that can delay gratification and continue to put more money back into the business to grow it faster, and do so for a long period of time, have the opportunity to build large companies due to the power of long-term compounded growth.

    What else? What are some other thoughts on the power of long-term compounded growth?